There is currently a significant shift in the way that lenders are approaching residential property loans, particularly in the investment sector, that I think it’s important to address and get the facts out there.
It starts with APRA(Australian Prudential Regulatory Authority)
The Australian Prudential Regulation Authority (APRA) oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies and most members of the superannuation industry. APRA is funded largely by the industries that it supervises. It was established on 1 July 1998. APRA currently supervises institutions holding $4.9 trillion in assets for Australian depositors, policyholders and superannuation fund members.
You can discover more about APRA here: http://www.apra.gov.au/AboutAPRA/Pages/Default.aspx
In lay terms, APRA’s role is to ensure that Banks (and the other institution types mentioned above) deal in ways that are prudent and measured, reducing risk to consumers and the public who engage their services. As a customer of a bank, this means you, and me!.
APRA has become increasingly concerned about the state of Residential Mortgage Lending and last December, released a letter to Australian Deposit-Taking Institutions (ADIs) essentially letting them know that come 2015, they would be taking steps to reduce risk factors in investment lending, interest only lending, serviceability criteria and potentially capital holdings requirements.
APRA has since been conducting in-depth reviews of ADIs “loan books” and has made its requirements clear to the ADIs, essentially ‘Reduce the growth of your investment lending or be forced to hold more capital.’
So, in order to comply with APRAs directives, there have been a raft of recent announcements:
- Many lenders reduced the loan to value ratio at which they will make investment loans (some reduced down as far as 80%) – the majority are now grouped at around 95% including the Mortgage Insurance (but other conditions and restrictions may apply.), however we expect to see these LVRs reduce further in coming months.
- Reduced “discretionary pricing” on investment loans and making only standard discounts the ‘new normal.’
- Almost all lenders have made adjustments to their affordability calculators, making it “tougher”, or requiring borrowers to have a greater surplus income after taking into account new loan repayments, and existing liabilities and living expenses.
- Some lenders made smaller changes to their investment loan interest rates for new investment loans going forward. (0.1 to 0.15% and only on NEW loans.)
However, in the last week, there have been some announcements which went further and shocked many, even those of us in the business:
- CBA announced that they would be increasing interest rates on ALL investment loans, INCLUDING existing investment loans, by 0.27%.
- ANZ Announced that they would be increasing interest rates on ALL investment loans, INCLUDING existing investment loans, by 0.27%.(See attached pdf for their Media Release.)
- Macquarie Bank announced that they too would be raising rates by 0.27%, gain for both new and existing investment loans – (Although at this time I have not seen a Media Release, we received an email from our Business Development Manager at Macquarie Bank advising of the changes.
- NAB (Including NABBroker, formerly called Homeside) announced that they are increasing interest rates on new and existing Interest Only loans (INCLUDING Investor and Owner Occupier) by 0.29%.
- AMP truly shocked when they advised that they were no longer offering new investment loans at all – Including their Self Managed Super Fund loan. – This was a truly a shock. At this stage, there has not been any announcement regarding an increase in rates for existing investment loans.
I expect more and more of these kind of announcements to follow and believe the next month or so will be quite tumultuous – As further announcements are made, updates will be posted on my Facebook and Twitter accounts. If you do not already follow these accounts, please consider doing so, to keep abreast of changes and how you may be impacted. There are links to both these accounts in my email signature. Naturally, you can also contact me directly at any time to enquire on any changes made by your chosen lending provider if you are at all uncertain.
But what does it mean for me?
As a current investor, your interest rate is either going up for sure (if your bank has already announced) or is likely to.
- If you have an Interest Only loan with NAB for your Owner Occupied Home Loan, your rate is going up also. (NAB Customers – You may consider switching to Principle and Interest to try and avoid these rate increases – You will need to contact the bank to arrange a Switch from Interest Only to Principle and Interest repayments.)
- As a customer who might have loans with one of the banks that has made an announcement of increasing rates already, and you’re angry or upset – PLEASE do not rush to refinance! I would suggest waiting at least a month to see what the other banks do too – There’s no use going through the process and cost of refinancing in protest of CBA for example, only to find that your new bank raises rates the week after you settle – you will have achieved nothing and cost yourself money… Wait and see where the chips fall, then we can review your position and decide on any action.
- For new or potential investors, PLEASE do not be scared off or swayed from considering property investment as part of your overall financial planning strategy. It may mean that you need a larger deposit or more equity than before, BUT there are still some loans available at up to 95% – and the interest rates may be higher, but we are still enjoying historically low rates, and there remains a high demand for rental property.
The lenders have been advised by APRA that failure to comply with the new measure imposed to reduce the lending portfolio growth in investor loans, will require a higher rate of capital holdings, and with even the big banks indicating that that is something they simply cannot afford – Comply they must, and quickly.
All in all, it’s important to keep in mind that this is an adjustment to the status quo, and there is no need to panic.
Longer term investors will recall a time not all that long ago that investment loans were at higher rates than owner-occupied loans as the normal way of things – That changed over time, and now it’s changing back. APRAs overall concern is that lending in Australia be kept to low-risk levels to ensure we continue to have a strong and robust banking system – Remember the GFC? Much of what we learned from then continues to have an impact on APRAs way of thinking now. A large part of the reason Australia was relatively unscathed during that period was that our banks were in incredibly good shape, lending was prudent and well-regulated, and our banks have high capital holdings that are closely monitored and regulated.
This is not the end of the world; it’s just a new world. Property Investment will continue to be popular, and strongly supported in Australia by consumers – It’s just a matter of time until we can determine the ‘new normal’ while the banks make their various policy and pricing changes.